Presentation on theme: "CHAPTER 14 Retirement and Estate Planning"— Presentation transcript:
1 CHAPTER 14 Retirement and Estate Planning By 2030, 76 million Baby Boomers will have retired. Only 46 million Gen X’ers will have come up to replace them.“If I knew I was going to live this long, I would have done things a whole lot differently!”– Oft-heard lament of senior citizens
2 Why Think About Retirement Planning Now? People are spending more years (16-20) in retirementA private pension and Social Security are most often insufficient to cover the cost of living“What private pension plan?!”Inflation may (not “may” – “will”) diminish the purchasing power of your retirement savings
3 Estimating Retirement Living Expenses Spending patterns will changeSome expenses may go down or stop…Work, clothing, housing, income taxesBut other expenses will probably go up…Medical, leisure, gifts and contributionsInflation will raise the amount you need to cover your expenses over your probable 16 to 20 or more years in retirementThe tricky wild card is health care. It is the only thing that truly scares Yours Truly with respect to my wife’s and my retirement.
4 How an “Average” Older (65+) Household Spends its Money FoodMedicalHousingTransportationClothingContributionsInsurance and otherEntertainment32.5%11.3%16.3%15.4%4.9%5.7%7.7%6.2%U.S. Bureau of Labor Statistics
5 Planning Your Retirement Housing Consider the cost of living and taxesMost people prefer to stay in their homes6 out of 7 people will remain in their homes“Reverse mortgage” can help supplement incomeContinuing care retirement communities provide increasing levels of careSome decide to relocate – Careful!Research carefully! Rent for a year or twoMore and more Americans are retiring abroad“Costa Rica, anyone?”Must still pay Federal income taxes but not stateHealth care is an issueIf you cancel Medicare, it will be expensive to rejoin
6 Planning Your Retirement Income Social SecurityMost widely used source of retirement income, covering 97% of U.S. workersMeant to be part of your retirement income, but not the sole sourceCheck the Earnings & Benefits statement you receive each yearFull retirement benefits at age 65 to age 67, depending on the year you were bornConfidence in Social Security is low
8 Planning Your Retirement Income (continued)Employer Pension Plans - Defined BenefitEmployer will pay you a certain amount per month when you retire based on your pre-retirement salary, number of years of service and your age at retirementThank you Southwestern College & CalSTRSEmployer makes the investment decisions for your and their contributions, but your benefit amount stays the same regardless of how the investments performUnless the fund goes belly up, of course…Social Security is an example of a defined benefit plan.
9 Planning Your Retirement Income (continued)Employer Pension Plans - Defined ContributionMoney-purchase pension plansPercent of your earnings are set asideStock bonus plansEmployer’s contribution is used to buy stock in your company for youProfit-sharing plansEmployer’s contribution depends on the company’s profitsSalary reduction plans (a.k.a. 401(k), 403(b), etc.)Employer makes non-taxable contributions – the “match”Employee contributions are tax-deferredUnless your company offers the “Roth 401(k), Roth 403(b)” option
10 Estimating Retirement Living Income Retirement CalculatorsAvailable on many, many financial websiteshttps://www.americanfunds.com/retirement/calculator/index.htmhttps://www3.troweprice.com/ric/ricweb/public/ric.doLongevity CalculatorSocial Security will send you an Estimated Benefits statement upon requestThey send one to you every year once you reach age 60Three months before your birthday
11 Types of Retirement Accounts Pre-tax Contributions401(k), 403(b), 457 for private & public employeesTSP for Federal employeesTraditional IRA for everyoneSEP-IRA, SIMPLE IRA, Keogh for self-employedTax Break NowDeduct contributions from income taxPay Taxes in RetirementPost-tax ContributionsRoth IRA for (almost) everyone“Roth 401(k), Roth 403(b)” if company offers itTax Break LaterTax-Free in Retirement!
12 Taxable Accounts versus Retirement Accounts BondsStocks“Cash”BondsMargining“Cash”Real EstateStocksOptionsShortingMutual FundsMutual FundsTaxable AccountRetirement AccountRegular accountIRA, 401(k), 403(b), Roth IRA, etc.No limit on contributionsStrict limits on contributionsNo limits on investment typesStrict limits on investment typesPay taxes every yearTax-deferred (Roth IRA – tax-free)Although there are many subtle and not-so-subtle differences, the major differences are how they are taxed by the IRS, how much money you can contribute, and what you can have in the account.
13 Individual Retirement Arrangement “What? I thought it stood for Individual Retirement Account!?”The most popular personal retirement planTraditional IRAAnyone with earned income can contribute to a Traditional IRAContributions are normally tax-deductibleUnless you have a retirement plan at your employment and make over a certain amountContribution limits are increasing$5,000 in 2012 (Same for Roth IRA – extra $1,000 if 50 or over)Investment grows tax-deferredYou pay taxes on the money as you withdraw it once you are retired. This is normally at age 59½Mandatory withdrawals begin at age 70½
14 And the IRA’s Many Cousins… 401(k), 403(b), 457, TSP ($17,000 limit, extra $5,500 if 50+)SEP IRA – self-employed, small business(25% of your earnings)Simple IRA – self-employed, small business($11,500 annual limit, $2,500 if 50 or over)Simple 401(k) – self-employed, small businessKeogh – self-employed, small businessRoth IRA – anyone with earned incomeUnless you earn too much – limits same as Traditional IRARoth 401(k), Roth 403(b) – limits same as 401(k), 403(b)They all work very much like the Traditional IRA [pre-tax contributions, tax-deferred] except for the Roth IRA, Roth 401(k), and Roth 403(b) [post-tax contributions, tax-free].
15 A Pre-tax Contribution Lowers Your Taxes Now Example: 401(k) / 403(b) You contribute via your paycheck:$100Your Federal tax withholding is lowered by:$25Your California tax withholding is lowered by:$8Total government subsidy:$33Your take home pay is only reduced by:$67But the whole $100 still goes into your account!
16 “So What’s the Catch?”You pay income tax on any amounts withdrawn in retirementBut people in retirement are usually in a lower tax bracketIf not, Congratulations!If you withdraw the funds before retirement…You pay the income tax, andYou pay a 10% penaltyExceptions for first home purchase ($10,000), higher education, medical disability and financial hardship (hard to get accepted by IRS)
17 A Post-tax Contribution Gives No Tax Break Now Example: Roth IRA You contribute to a Roth IRA:$100Your Federal tax withholding is lowered by:$0Your California tax withholding is lowered by:Total government subsidy:Your disposable income is reduced by:So Why Contribute to a Roth IRA?
18 “Because a Roth IRA is So Cool!” Tax-Free in Retirement is a Golden OpportunityNo other investment choice comes closeEventually, they will probably be gotten rid ofPlus, you can withdraw the contributions at any time with no penaltyYou have already paid tax on the contributionsThis makes the Roth IRA also an excellent intermediate-term investment accountPurchase of a house or other high-ticket itemGreat for college expensesCurrently not used in Financial Aid calculations
19 But a Roth IRA is not for everyone Yes, it is. You just have to learn how to navigate the paperwork.Limitations on Roth IRAs ContributionsOnly single taxpayers with an AGI of $110,000 or less in 2012 and married couples with an AGI of $173,000 or less in 2012 can fully contribute to a Roth IRAIf you don’t qualify, Congratulations!But you can contribute to a Roth IRA anywayIf you find that you have made over the limit, you can “recharacterize” the contributions into a Traditional IRA (which does not have the same limitations) before you file your taxesAnd then you convert the Traditional IRA to a RothI know. I know. Who voted for these bozos?Oh, yeah. We did…
20 Tax Credit for Low Income Earners Up to 50% of contributionsMaximum of $2,000Based on Adjusted Gross Income$27,750 or less – single filers$57,500 or less – married filing jointly$43,125 or less – head of householdReminder: A tax credit is a dollar for dollar reduction of income taxesIf you do your own taxes, don’t forget this. If you have someone do them, make sure to remind them you made contributions to a retirement account.
21 “Roth 401(k)” / “Roth 403(b)”If your employer offers the option, you are able to place after-tax dollars into your 401(k) or 403(b) accountsPost-tax contributions like a Roth IRAAlthough contributions can not be taken out without penalty or taxes (as can be done with a Roth IRA)This option is popular with workers in lower tax brackets. They don’t need the tax break now. They are not quite as good as the Roth IRA unless your company matches your contributions. If your company matches your contributions, the Roth 401(k) is the winner.
22 Anticipated Sources of Retirement Income Social SecuritySpouse’s pensionSavings12%27%Other9%401(k)7%18%IRA8%Home equity5%Part-time workPensionSocial Security Administration
23 The “Baby Boomer” Generation Retirement Time Bomb We Have a Serious ProblemBetween 1940 and 2010, average lifespan has increased by 15 years, whileThe retirement age for Social Security has increased only two yearsIn 1940, there were very few retirees per workerMost workers, particularly men, simply did not live to 65Now, not only do most workers reach retirement, their retirement lasts an average of yearsEvery day for the next 25 years, 10,000 people will have their 65th birthday
24 The “Baby Boomer” Generation Retirement Time Bomb (continued)Ratio of Workers to Retirees194030 workers for every 1 retiree30 to 120103 workers for every 1 retiree3 to 120501.5 workers for every 1 retiree1.5 to 1
25 The “Baby Boomer” Generation Retirement Time Bomb (continued)But how did we manage to go from 30 workers per retiree down to 3 workers per retiree without significant economic upheaval?Two-worker families became the norm (30:1 15:1)Plus productivity gains have been substantial, andQuite simply, as the number of retirees grew,The number of children per worker diminishedTherefore, the ratio of workers to dependents has stayed roughly the sameThe only difference is that the dependents have shifted from children to the elderly
26 The “Baby Boomer” Generation Retirement Time Bomb (continued)The Problem is Two-foldBaby Boomers are not saving enough for their retirement“Unless a big bucket of cash falls out of the sky, I’m going to be working until I die.”There will not be enough workers to service the economyLet alone provide the health care and other services that the retirees will demandRecall: The average person between ages 60 and 70 uses more medical resources than they did between ages 0 and 591/3 of all Medicare dollars are spent in the last year of life
27 Possible Solutions – Financial Aggressive saving by BoomersYeah, Right…Everyone over 50 should be socking away the new maximum limits into their 401(k)’s, IRA’s, etc.But unfortunately, it jest ain’t happenin’Raising Social Security taxesRemoving the $110,100 limit on Social Security taxes for the wealthyOlder people have traditionally more sway with politiciansRecipe for intergenerational warfareTaxes would essentially have to doubleFrom 8% up to 16%3 workers down to 1.5 workers
28 Possible Solutions – Financial Lowering Social Security benefitsAgain, seniors have traditionally more sway with politiciansYet another recipe for intergenerational warfareThe previous administration’s 2005 proposal would have reduced benefits by up to 49% for many workers over the next several decadesWould have hit the middle class the hardestSurprise!
29 Possible Solutions – Financial (continued)Investing Social Security in the stock marketYa’ don’t hear too much about this one anymore since the stock market plummeted Fall of 2008Will be very, very costlyEstimates range from between $2½ to $4½ trillion dollarsSince the pensions of current beneficiaries will still need to be fundedHowever, …
30 Possible Solutions – Financial (continued)Financial solutions alone will not workAn economy consists of both supply and demandLet’s assume Boomers saved enough for their retirement(In other words, there is enough demand)If there are not enough goods and services to service the demand,(In other words, there is insufficient supply)The result will be large-scale inflation of goods and services or large-scale deflation of financial assets, or both“Huh? What?”
31 Possible Solutions – Financial (continued)If I save more than everyone else, then I can retire without a problemThere will be enough goods and services to supply my needsIf everyone saves more, then everyone will want the same goods and servicesEveryone will all be bidding up the prices of health care, leisure, retirement housing, etc.Or everyone will have to accept lower prices for our saved financial assets since everyone would be trying to sell them at the same time to pay for the same goods and servicesMost likely, both actions will occur somewhat
32 Possible Solutions – Economic Increased productivitySame problem as increasing Social Security taxesMust be shared with post-BoomersWill help economy substantially, but not necessarily the goods and services that retirees needIncreased Developing World tradeThe next engine of world economic growth?But retirement goods and services are not easily traded across the globeHealth care, golf memberships, assisted-care housing, etc.Remember the “Surgery Vacations”?Reallocation of the work forceHealth care, Health care, Health care
33 Possible Solutions – Demographic Increased immigrationEver visited a nursing home or assisted-living facility?But to maintain the same ratio of workers to retirees, we would need approximately 85 million immigrantsIncreased retiree emigration“Costa Rica, anyone?”But again, the numbers are mind-numbing120,000 retirees leaving each month for the next 30 years would keep the above ratio intactThe above two scenarios will help somewhatBut not significantlySo how we gonna’ do it?
34 Possible Solutions – Demographic (continued)Raising the retirement age!To maintain the current ratio of workers to retirees, we would need to raise the accepted retirement age to 72 or 73 by the year 2030This will happenIf not mandated, retirement will simply become unaffordable or unavailable to more and more workersIt is already happening!Retirees are returning to the work forceTheir health is good; they want to be productiveBusinesses are accommodating older workersFewer hours, more flexible work schedulesYou are now hearing politicians saying that we need to raise the retirement age. Before 2010, no politician would have dared say anything like this for fear of being lynched!
35 The “Baby Boomer” Generation Retirement Time Bomb We Will Solve This ProblemWe have faced serious problems beforeThe American economy is extremely resilientThe American people are extremely resourcefulA combination of some or all the previous possible solutions will be implemented, with or without formal planning and consensusAlthough we Americans are very resilient and resourceful, we tend to be horrible at planningWe will indeed be living in “interesting times”Are you familiar with the ancient Chinese curse?“May you live in interesting times”
36 Retirement – The Bottom Line The Nature of Retirement will ChangeExpect on living much longer than you ever thought you would“Yippee! Hurray!”Expect on working much longer than you ever thought you would“Boo! Hiss!”Start saving now!“Grumble. Bitch. Gripe.”
37 What is Estate Planning? Your estate consists of everything you ownAn estate plan is how you set up to administer and distribute your property during your life (gifts) or after your death (inheritance)Estate planning is not just for the wealthyIf you own a home or have children, you need estate planningNot to be construed as legal advice…Estate planning includes both building your estate, and also transferring your estate upon your death“Death and Taxes” We’ve already done taxes. Now’s the time for to do da’ death thing.
38 What is Estate Planning? (continued)Most people give little or no thought to putting their personal and financial affairs in order for their families that survive themNaming a guardianDistribution of personal belongingsDemands of daily living can keep people from thinking about deathPlus it just ain’t fun to think about your own mortality!
39 What is Estate Planning? (continued)Plan while you are in good healthMany people procrastinateUntil some life-threatening illness or near-death accident scares them into actingEstate planning is especially important for non-traditional households and businessesUnmarried partners“Happy” relationshipsBusiness partnership relationships
40 Estate Planning: Should You? Hire a lawyer?Expect to pay between $200 to over $1,500$200 for a will, $500 to $1,500 for a trustGo it alone?Books, software, pre-printed formsMany, many Internet sites designed to help younolo.comdoyourownwill.comhrblock.comlegalzoom.comWhat did we say about taking out your own appendix? Get a good referral!
41 What Estate Planning Involves Create, review, and update your will/trust/etc. on a regular basis, especially if you get married, divorced, or move to another stateA codicil is a document used to amend an existing estate documentName an executor for your estateConsider creating and managing a trust or trustsMost all Californians would benefit from a trustNot to be construed as legal advice…Prepare a letter of last instructionsNo legal standing but can be very helpfulOrganize current financial records and documents, and let family members know where they are!
42 Make an Inventory of Your Estate Financial investments, retirement accountsYour home and any other real estateBusiness interestsInsurance policiesAntiques, art, collections, carsTitles to the vehiclesImportant documentsSocial SecurityVeteran documentsRemember your net worth statement?
43 WillsA will is the legal declaration of a person’s mind as to the disposition of his or her property after deathMarriage and divorce affect your willMarriage may revoke your will depending on the state you live inReview your will with an attorney if you marry or divorce. You will probably want a new one anywayLegal costs to prepare a will vary with how complex it isA standard will costs between $200-$500 dollarsAlthough I don’t personally recommend it, you could probably do your own will without creating a legal nightmare for your heirs.
44 Intestate and Probate Intestate Probate Means you die without a will The state distributes your assetsThe state will decide on a guardian for your childrenVery complicated if you also have a “blended” familyProbateProbate court validates wills and makes sure your debts are paidOften, people try to avoid the probate process by using a living trust (more later)
45 Choosing an ExecutorFind out if the executor is willing to accept this major responsibilityFind out if he or she is capable and trustworthyIf you don’t name one, the court will name one for you – not the best alternative!Being an executor is a serious responsibility. Choosing an executor is an even more serious task. Consider choosing co-executors, your attorney or a trust company and a friend or family member. Make provisions to pay the friend for their time. Your friend can do the leg work for $50 to $75 per hour. The attorney will make sure the important tasks are done correctly (at $175 to $250 per hour).
46 Responsibilities of an Executor Takes control of assets of the estateFiles an inventory of assets and liabilities with the courtSells assets if necessary to pay liabilitiesDistributes assets, based on the instructions in the willMakes a final accounting to the courtThe executor or co-executors have enormous power. There are countless stories of abuses of that power. Choose carefully.
47 Selecting a GuardianEven if you don’t have much assets, if you have a child or children, you still need a will to at least name a guardian1The guardian assumes the responsibility for providing the child or children with personal care and managing the estate for themBe sure the person is willing and able to raise themSee if their values and child rearing practices match yours1Not to be construed as legal advice…
48 Prenuptial AgreementWaives rights to each other’s property that was acquired before the marriageAgree on a settlement if you should divorceVery important for couples who already have children or assets or bothAt least talk to a lawyer about the advantages and disadvantages of a prenuptial agreement before getting marriedAnd if your would-be spouse refuses to even discuss a prenuptial agreement, that should serve as a disturbing omen…Don’t say I didn’t warn you!
49 A Living WillProvides for your wishes to be followed if you become so physically or mentally disabled that you are unable to act on your own behalfDiscuss your living will with those close to youSign and date it before two witnessesGive copies to those close to youRequires careful thoughtActually, it’s a no-brainer! (Sorry, could not help myself…)
50 Power of Attorney Power of attorney Legal document authorizing someone to act on your behalfCan be limited or gives a great deal of powerDurable power of attorney for health careIf you are unable to make decisions regarding your health care this authorizes someone to do it for youAgain, as with the executor of your estate, choose carefully who you give power of attorney to. They will be in control of your assets.
51 Letter of Last Instruction Not legally enforceableProvides heirs with informationShould include...Your funeral preferencesNames of people you want notifiedLocation and contents of safe deposit boxAssets and debtsWho gets personal effects that are of little valueAvoids having the lawyers and the courts to deal with it (and charging you their hourly rate!)
52 What is a Trust?A trust is a legal arrangement through which a trustee holds your assets for your benefit or that of your beneficiariesTakes care of or manages your propertyIn some trusts, you are the trusteeDistributes your assets to your heirs from the trust after you die according to your instructionsAll assets are taken out of your name and put in the name of the trust or trustsTrusts are tricky. Some people create them for themselves. You can do this but if you screw up, your actions can result in outcomes that range from (typically) useless to (potentially) disastrous.
53 Possible Benefits of a Trust Avoid probate!More later about probate and CaliforniaCan reduce estate taxesFrees you from managing assetsOr you can be the trustee of your own trust and you manage the assetsProvide income for a surviving spouseOr other dependentsTrusts can be extremely helpful for people whose children or grandchildren are either disabled or emotionally unprepared for a windfall inheritance.
54 Types of Trusts Revocable living trust or Inter vivos trust Credit-shelter trustDisclaimer trustMarital-deduction trustSelf-declaration trustTestamentary trustGrantor-retained annuity trustPrivate Annuity TrustA/B TrustsLife insurance trustCharitable remainder trustQualified personal residence trustGeneration-skipping trustSpendthrift trustAsset Protection Trust
55 California and Living Trusts Revocable Living Trusts, A/B Trusts, etc.Very common in CaliforniaUsed to avoid probate and reduce estate taxesIf you are a California resident who owns property or has any substantial net worth, your estate will most likely benefit from some sort of living trustNot to be construed as legal advice…Legal fees range from $500 to over $1,500Please don’t try to do your own trust – Why?Let’s say it again: If you screw up, your actions can result in outcomes that range from useless to disastrous.
56 Probate Costs in California Gross Asset Value of EstateMinimum Probate FeesProbate Fees with Living Trust$200,000$14,000$0$300,000$18,000$400,000$22,000$500,000$26,000$750,000$36,000$1,000,000$46,000$2,000,000$66,000Assuming you find a good lawyer to set up the trust correctly!
57 Federal and State Estate Taxes Federal estate taxEstate and trust federal income taxesState inheritance taxGift taxTax avoidance versus tax evasionCharitable bequestsReduces the size of the estateDouble tax break – before and after deathPaying tax owedOften assets must be sold to pay for the taxPlan ahead to avoid this (there are many options)
58 Federal Estate Taxes Exclusion YearExclusionMaximum Rate2011$5,000,00035%2012$5,120,000After the huge “Bush tax cuts” fight at the end of 2010, the result was that the first $5,000,000 of your estate is “excluded” and is bequeathed to your heirs tax free. The exclusion amount was indexed to inflation for 2012 and was raised to $5,120,000. Of course, we have to go through the wrangling again at the end of 2012 or the limit will go down to $1,000,000 automatically. The Republicans want the estate tax to be repealed permanently. They refer to it as the “death tax.” Winston Churchill described it as “a certain corrective against the development of a race of idle rich.”It affects about 0.24% of all Americans, far less than the top 1%.
59 Speaking of Inheritances… The Greatest Transfer of Wealth in the History of the WorldWill begin shortly$41 trillion in the next 50 years$6 trillion in taxesOnly a small number of estates will be affectedBut many of them are in the tens of billions of dollars2/3 of it will go to people who are already wealthySo, if you are one of the lucky ones who will be the recipients of an inheritance…
60 Dealing with a Windfall You suddenly receive $300,000or $500,000 or $800,000 or $1,200,000 or whateverYou think you are now one of the rich and wealthyYou Are Set For Life!Or are you?The Average Joe or Jane Lottery Winner whose life was ruined by winning the lottery has become a cliché.“It was a fun three years.”What would you do with a windfall?
61 Dealing with a Windfall (continued)Change Your Lifestyle Very Little!Be careful of acquiring a sense of responsibility for family and friends – and even strangers!They will often expect you to share your windfall with themConsider not touching the money for six monthsFind a trusted financial advisorWhatever you do, realize that this is it. This is the one and only inheritance you will receive from your Dear Grand-Aunt Trudy. Don’t squander it.
62 The Final Instruction regarding Estate Planning And for BUS-121Financial Planning and Money ManagementSpring 2012Go See A LawyerGet a good reference